Professional Documents
Culture Documents
Request for Comments Concerning the Application of Sections 162 and 263 to Tangible
Property
Notice 2004-6
01-2200 (W.D. Tenn. August 28, 2003); Ingram Indus., Inc. v. Commissioner, T.C.M.
2000-323; LaSalle Trucking Co. v. Commissioner, T.C.M. 1963-274. Are there other
facts or circumstances that should be taken into account?
4. What is “value” for purposes of the “material increase in value” rule? Does
“value” refer solely to the fair market value of the property? Alternatively, should any
“enhanced functionality” of the property in the taxpayer’s business (e.g., an
enhancement to capacity, productivity, quality, or efficiency) be treated as an additional
basis for capitalization? See Vanalco, Inc. v. Commissioner, T.C.M. 1999-265, aff’d sub
nom., Smith v. Commissioner, 300 F.3d 1023 (9th Cir. 2001).
6. What is “useful life” for purposes of the “substantially prolongs useful life”
rule? Is “useful life” the period the taxpayer may reasonably expect to use the property
in its trade or business (see § 1.167(a)-1(b)) or the period of use inherent in the
property? Should the following factors be considered in determining a property’s useful
life: (1) wear and tear or decay and decline from natural causes; (2) normal progress of
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art, economic changes, inventions, and current developments within the industry or the
taxpayer’s trade or business; (3) climatic and other local conditions specific to the
taxpayer’s trade or business; (4) the taxpayer’s policy as to repairs, renewals, and
replacements; and (5) whether the asset was subject to unusual wear and tear, for
example, heavy or extraordinary use. See § 1.167(a)-1(b). Should the recovery
periods under § 168 be relevant to the determination of “useful life” for capitalization
purposes?
8. Is § 263(a)(2) a different test from the “substantially prolongs the useful life of
the property” test? If so, what rules should be provided for determining whether an
expenditure “restores property or makes good the exhaustion thereof for which an
allowance is or has been made” within the meaning of § 263(a)(2)?
11. Should the regulations provide “repair allowance” type rules? For example,
should the regulations provide rules similar to the percentage repair allowance system,
since repealed, that is described in § 1.167(a)-11(d)(2)? If so, should the allowance be
an annual amount based on a percentage of the unadjusted basis of the asset or should
the allowance be an annual amount based on gross receipts or net income? Should a
repair allowance be structured as a safe harbor? Should a safe harbor apply to both
personal property and real property? See Alacare Home Health Serv. Inc. v.
Commissioner, T.C.M. 2001-149.
12. Should the regulations provide a de minimis rule? If so, what should the de
minimis amount be (e.g., a fixed amount, a percentage of the fair market value of the
property, a percentage of the unadjusted or adjusted basis of the property, or a
percentage of the cost of equivalent new property)? Should a de minimis rule be
structured as a safe harbor? Should a de minimis rule apply to both personal property
and real property? Should the de minimis amount be periodically increased (or
decreased), and if so, how? See Cincinnati, New Orleans and Texas Pac. Ry. Co. v.
United States, 424 F.2d 563 (Ct. Cl. 1970); Alacare.
13. What facts are relevant in determining whether a repair must be capitalized
under the “plan of rehabilitation” doctrine? Should the regulations adopt a facts and
circumstances analysis that looks to the purpose, nature, extent, and value of the work
done? See United States v. Wehrli, 400 F.2d 686 (10th Cir. 1968). What connection is
required between the repairs and the capital improvements for the plan of rehabilitation
doctrine to apply? That is, must repairs be incident to, integral to, contemporaneous
with, or because of the capital improvements? How extensive do the capital
improvements have to be to result in a plan of rehabilitation (e.g., is at least one capital
expenditure required before the doctrine applies and may a single capital expenditure
cause the doctrine to apply)? Are repairs part of a plan of rehabilitation when the
repairs are done in preparation for or as part of a remodeling project? See Norwest
Corp. v. Commissioner, 108 T.C. 265 (1997). If so, what constitutes a remodeling
project? Does the doctrine apply if the work is part of a continuous or ongoing process
of replacing an asset over time (e.g., if normal operation requires ongoing repainting
and repapering, do repainting and repapering costs become capital if they correspond
with a capital remodeling project)? See Moss v. Commissioner, 831 F.2d 833 (9th Cir.
1987). Should the regulations establish a bright-line test that repairs of property are
considered part of a plan of rehabilitation if the property is, at the time the repairs are
made, not suitable for its intended use, in a general state of disrepair, or at the end of its
useful life? Should the regulations address other issues, such as whether a written plan
is required and whether the existence of a written plan indicates a plan of rehabilitation?
14. Should the regulations provide specific rules for any particular type or
category of expenditure?
15. Are there any situations in which the tax treatment of an expenditure to
repair, improve, or rehabilitate tangible property should follow the financial or
regulatory accounting treatment for that expenditure?
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